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Lam Research Corporation(LRCX - Snapshot Report) reported third quarter fiscal 2013 non-GAAP earnings of 44 cents per share, beating the Zacks Consensus Estimate by 6 cents or 15.8%.

Revenues of $844.9 million dropped 1.9% sequentially but grew 28.2% year over year. The year-over-year improvement was driven by continued strength in the foundry segment at the 28-nanometer node.

Revenues by Geography

Revenue contribution from North America in the third quarter was 26.0%, up 6.3% from the prior quarter. Europe’s contribution was 10.0%, up 22.7% sequentially. Korea saw the strongest growth among Asian countries, increasing 14.5%, followed by Japan, which was up 8.0%. Taiwan and other Asia, which Lam refers to as Asia-Pacific declined 1.9% and 36.2%, respectively. Japan, Korea, Taiwan and Asia-Pacific generated 11%, 14%, 26% and 13% of third quarter revenues, respectively.

Shipments

Shipments were roughly $896.0 million during the quarter, increasing 11.6% from $803.0 million in the prior quarter. Foundries accounted for 56% of total shipments, NAND 15%, DRAM 16.0%, with Logic and Others bringing in the balance.

From a geographical perspective, North America contributed 21.0% of third quarter 2013 shipments (29.0% in the second quarter of 2013). Europe generated 9.0% (same as in the prior quarter), Japan brought in 11.0% (14.0% in the prior quarter), Korea contributed 12.0% (same as in the previous quarter), the Asia Pacific contributed 14.0% (same as in the previous quarter) and Taiwan accounted for 33.0% (22.0% in the December quarter).

Margins

The GAAP gross margin decreased 32 basis points (bps) year over year to 40.2%. Lower revenues coupled with unfavorable customer mix were the main reasons for the gross margin contraction.

Total operating expenses of $329.0 million were up 57.4% from $209.0 million in the year-ago quarter. Operating margin was 1.3%, down 754 bps from 8.8% recorded in the previous-year quarter. Both research and development and selling, general and administrative expenses increased as a percentage of sales and the lower gross margin made matters worse.

Net Income

GAAP net income was $19.0 million or 2.2% of sales compared with income of $45.6 million or 6.9% of sales in the year-ago quarter. Reported earnings per share were 11 cents, down from 38 cents in the prior-year quarter. After adjusting for restructuring charges and impairment of long-lived assets on a tax-adjusted basis, non-GAAP earnings were 44 cents in the quarter compared with 50 cents in the year-ago quarter.

Balance Sheet

Inventories rose 2.8% sequentially to $545.0 million in the third quarter. The company ended the quarter with cash, cash equivalents and short-term investments of $2.36 billion, down from $2.52 billion in the previous quarter. Lam Research’s long-term debt and capital lease balance was $1.29 billion in the third quarter. Day sales outstanding (DSO) were 63 days and inventory turns were 3.7X. Cash from operations was $102.5 million in the third quarter, down from $193.2 million in the previous quarter. Capital expenditure in the quarter was $34.8 million, down from the second quarter capex of $38.9 million.

Lam Research undertook share repurchase activity of 5 million shares worth $214 million in the March quarter. Further it authorized new share repurchase activity of $250 million, which is expected to be complete in 2014.

Guidance

For the fourth quarter of 2013, Lam Research expects revenues in the range of $945.0 million–$1.05 billion. Shipments are expected to be roughly in the range of $1.045–$1.105 billion. Gross margin is expected to be in the range of 43%–45% and operating profit within a range of 11.5%–14.5%. Earnings are forecasted to be in the range of 63 cents to 77 cents on a share count of 168.0 million. The Zacks Consensus Estimate for the fourth quarter is pegged at 61 cents.

Our Take

Lam Research delivered decent third quarter 2013 results with the bottom line beating the Zacks Consensus Estimate. Strengthening demand at Taiwan Semiconductor was encouraging. But foundries are not the only segment seeing growth, Lam’s memory business was also very strong in the last quarter, with shipments at both NAND and DRAM customers increasing strong double-digits. Further, the company provided a strong fourth quarter guidance reflecting modest improvement in semiconductor spending.

Lam Research is well-positioned in the semiconductor equipment segment and its closest peers in the segment are Applied Materials (AMAT - Analyst Report), Tokyo Electron and ASML Holding NV (ASML - Snapshot Report). It has further solidified its position with the addition of Novellus Systems’ thin-film deposition and surface preparation product lines. We are positive about Lam Research’s strategic collaboration with Axcelis Technologies, Inc. (ACLS - Snapshot Report) as it promises multiyear growth in etch, deposition, clean and installed base businesses. We are also optimistic about its prospects in non-oxidizing strip applications for advanced memory and logic applications.

Further, Lam Research is witnessing strength in the advanced packaging segment as it won several design wins in advanced wafer-level packaging applications.

Lam Research has a Zacks Rank #2 (Buy).

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